Bank of England injects £50 billion into the economy
The Bank of England will inject £50 billion in additional quantitative easing (QE) into the economy to continue to shore it up against the risk of another recession.
The latest cash injection brings the total amount of QE stimulus to £325 billion since the programme was initiated in 2009.
The process involves the purchase of mainly government-issued bonds from banks and aims to improve lending.
Although the latest round of QE was widely anticipated, and many experts had forecast the figure to be £75 billion.
In a positive move, the Bank is thought to have reduced the amount on the basis of encouraging signs that the UK is moving further away from a double-dip recession.
Even so, concerns about the eurozone and weak consumer spending remain.
Jeremy Batstone-Carr, chief economist at Charles Stanley, believes that more QE is on the cards. "The forthcoming quarterly inflation report seems likely to confirm the need for additional monetary policy stimulus, despite the better tone to UK activity data in early 2012 to date," he remarked.
Batstone-Carr believes that the medium-term inflation forecast may be edged higher in the wake of stronger data, but still forecast to fall below target.
"Since the previous meeting, annualised Consumer Prices Index (CPI) inflation has fallen to growth of 4.2%, commodity prices have slipped and energy utility companies have confirmed price cuts. Sterling has appreciated on a trade weighted basis, imparting modest potential downside pressure on the medium-term inflation target," he said.
Thomas Paterson, chief economist at broker Gold Made Simple, also predicts a repeat performance. "We expect the Bank to print at least an additional £100-£150bn before the year is out," he forecast, describing the latest round of QE as "beyond madness".
Ranvir Singh, chief executive of market analyst RANsquawk, also questioned the use of QE. "The Bank of England's primary growth stimulating weapon clearly has impressive firepower. December's drop in inflation persuaded the governor to remove the safety catch and take aim for a fourth time."
But QE's accuracy and efficacy are both being questioned.
"There is the risk that each successive volley will have less impact on Britain's listless economy. With inflation predicted to continue falling in 2012, the risk of inflationary side effects from further QE will reduce," Singh said, warning: "Forget the risk of inflationary collateral damage. If QE is deemed to be missing its target, that is a far greater concern."
This was written for our sister website, Interactive Investor
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).